When it comes to investing for your retirement, there are many decisions to make, such as: What type of account is right for me? How do I allocate my investments? How much do I even need to retire? It can be overwhelming trying to make the right financial decisions.
One question many often overlook when it comes to financial planning is Target Date Funds vs. Managed Accounts: Which is Better for Your Retirement Plan?
While there is no “right” or “wrong” answer to this question, it typically depends on a few different factors, such as your age, risk tolerance, lifestyle needs, etc.
What are TDFs (Target Date Funds)?
Target Date Funds, also referred to as TDFs, are a specific type of mutual fund or ETF (exchange traded fund) that are specialized to meet an investor’s goals for a certain timeframe (also called a target date). The purpose of these funds can be saving for retirement, a child’s college education, or any goal you may have that has a set date in the future.
Target date funds work by optimizing your investments to align with your timeframe goals, and weighing the risk and rewards of the assets based on your timeline.
For example, someone in their early 20’s who is saving for retirement will likely have their target date fund set to be the timeframe in which they are planning to retire (this may be their 50’s, 60’s, etc).
Keep in mind, the TDFs of a younger person will likely be much more volatile and risky (also referred to as ‘aggressive’) as they have plenty of time for their money to grow in the market, and will not be withdrawing for many years.
While someone who is closer to retirement’s TDF will be less volatile and more ‘risk-averse’, as it is not recommended to risk your nest egg when you are close to retirement.
What Is The Difference Between a Managed Account and a TDF (Target Date Fund)?
A managed account differs from a target date fund due to the fact its management is hands-on by a financial professional who is selecting investments on a personalized basis. A target date fund is more of a one-size-fits-all approach to investing, which is not always in your best interest.
Your investment approach can differ from others due to many factors including your age, own personal risk tolerance, asset allocation preferences, lifestyle and retirement preferences, etc. Although, you will find that there are different costs and benefits related to both options. It can be beneficial to choose the account type that best suits your individual needs and goals.
Benefits of a Managed Account
Easier to customize to your needs unlike target date funds.
Many 401k participants will default to a target date fund in their retirement account because it is easy to allocate based on your estimated retirement age. The issue with this is that, as participants age and accumulate a larger account balance, they tend to start making mistakes with TDF’s. This includes holding more than one TDF, mixing in other asset classes, etc.
By having a managed account, there you will have a personalized investing approach that can be easily changed as you get older and closer to your investment goals.
Serves as a Fiduciary
Another benefit of a managed account vs target date funds is that a managed account serves as a fiduciary while a target date fund 401k does not.
A fiduciary is a person or legal entity, such as a bank or financial firm, that has the power and responsibility of acting for another (usually called the beneficiary or principal) in situations requiring total trust, good faith and honesty.
Companies such as Artesys are able to partner with financial advisors to provide this benefit to clients as well as offering investment and cost transparency not found in TDFs or risk based funds.
Managed Accounts Can Provide Better Returns
Managed accounts can be attractive to retirement investors, due to the flexibility and customization of asset allocations. Having a financial professional assisting you with investment decisions is also a huge benefit for those who are not as financially savvy.
According to Plan Advisor:
“Consistent managed account users had an average annualized 10-year return net of fees that was 0.27% higher than that of consistent non-users, and consistent full TDF users had an average annualized 10-year return that was 0.26% higher than that of consistent non-users.
Twenty-five percent of consistent non-users earned a 10-year annualized rate of return that was 2% or less. In contrast, just 4% of consistent managed account users and 3% of consistent full TDF users earned an annualized return of 2% or less over the same 10-year period. The seventy-fifth percentile for the 10-year annualized rate of return for consistent non-users was 5.80% compared to 4.04% for consistent managed account users and 4.31% for consistent full TDF users.”
With a higher average rate of return, it often offsets fees associated with the managed account service you choose. This can especially be helpful to young investors who have the power of compound interest on their side— where every little bit can make a huge difference in the long run.
So, Which Account is Right For Me?
Hopefully, by now you have a good idea of what the key differences are between Target Date Funds and Managed Accounts, but you may still be wondering “Which Account is Right For Me?” and there are a few factors that can help to determine the answer to this question.
Managed accounts are generally favored by those who are older and may be closer to retirement age. Many decide to make the switch from target date fund to managed account later in their investing journey as their accounts are larger and need more assistance in the final stretch. This is not to say younger investors shouldn’t take part in managed funds, but most younger investors tend to stick their money in their 401k and let the target date fund do its job, and that is alright! Our recommendation is that you speak to a financial professional if you need help deciding which option can benefit you the most.
Lifestyle and Goals
If you are looking for the quickest/easiest strategy, a target date fund may be a good choice. For those looking to personalize their portfolio to match their own lifestyle and goals, it is always a good idea to have a trusted financial professional managing the account. This ensures that you are adjusting your assets regularly and if your goals change (such as taking an early retirement, moving out of state, etc), you can adjust your portfolio along with it.
As mentioned above, many who utilize target date funds are actually making a mistake by mixing different asset classes along with their TDFs, thus making their portfolio less efficient. They might be in the mindset of diversification (which is almost always a good idea with investments), but they may lack the knowledge to successfully do so. This is where a managed account may be a good idea as you can diversify with different asset classes without having to worry about sacrificing potential gains. With a managed account you have greater visibility into your holdings, and can see exactly where your funds are invested and how they are performing in each category.
You’re already on the right track if you’re reading this article and are wanting to learn more.
Both target date funds and managed accounts have their pros and cons. It is important to step back and take a look at your situation to determine what approach would provide the greatest benefit.
Whatever path you decide to take, make sure you are informed and your investments are working for you. If you are still unsure of what account best fits your personal needs, reach out to a trusted financial professional such as Artesys to help guide you in the right direction.
Phone: (877) 880-2543